“Use your mentality, wake up to reality” (Frank Sinatra). Many sellers of salons are completely unaware of how to properly price their highly treasured business. Several factors are considered at Five Star Business Brokers of South Florida when it comes to properly pricing and advertising salons for sale. Primarily, buyers consider the salon cash flow without the sales from the seller’s own clients; the lease terms, the location, and the build-out/equipment inside the salon. Let us explore, and as old Blue Eyes said, wake up to reality.
First, a buyer will examine and assign a multiple to the owner benefit of the salon. Defining the owner benefit of a salon is a bit tricky and may be subject to some debate. If the seller is not a working owner then there is no debate. Five Star Business Brokers of South Florida performs its usual financial reconciliation and compiles the adjusted owner benefit. But many sellers – particularly in smaller salons – are working stylists in the salon. Even their family members may work in the salon. In these circumstances, most buyers will only include sales from stylists who will stay after the sale in their determination of the owner benefit of the salon. If the seller (or family members who may not be paid in a regular fashion) agrees to stay after the sale and work on a commission split, then such customer sales (after the commission split) may be used by a buyer in determining the owner benefit.
Once a usable owner benefit total is defined properly for a typical buyer’s satisfaction, Five Star Business Brokers of Palm Beach County must assign a multiple to the owner benefit total. This multiple is usually 2-3 times, and varies with the following factors.
The lease is a very critical factor to determining the salon’s asking price. A long term lease is always preferred because it gives the purchaser some degree of security that they can stay indefinitely and reap the rewards of their purchase. Also, rent needs to be within the buyer’s expectations, and such rent should not be above market prices. Some buyers may also get scared away if the landlord is not helpful in maintaining the premises.
As in real estate and as in determining a salon’s value, a good location is of paramount importance. In every salon listed and sold by Five Star Business Brokers of South Florida, having a knowledge of which buyers want salons in which specific areas is very helpful. Many buyers of salons want the salon to be close to where they live, especially if they are a working stylist. They also only want to be in certain areas that better cater to the type of clients they wish to serve.
The importance of the cost of the build-out and equipment within a spa or salon is often a debated point between a buyer and seller. In general, the cost for the build-out and equipment is far higher than the depreciated value of the equipment that can be removed from the salon’s premises. However, a relatively expensive build-out enhances the desirability of the lease and hence the valuation multiple. The value of the equipment such as the chairs are also a useful tool. One should always still remember the following: Five Star Business Brokers of South Florida has been a part of several situations where the original owner of a salon spent many hundreds of thousands of dollars (sometimes $500K or more) and was asking for a fraction of this cost. A beautifully built salon does not mean that it will generate sufficient income to be worth its original cost to open. Other factors come into play such as too high rent, disharmony with the stylists, and simply not enough clients because of too much competition.
Above all else, the properly defined owner benefit of the salon, lease, and location are the best places to derive a salon’s fair market price. Selling a salon should not be a painful experience, and sellers should have their evaluation done properly and have realistic expectations about the selling process. Then they can be free to pursue the next phase of their life. Because as Frank said, “The best is yet to come.”
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your hair salon, nail salon, or spa.
Located in Palm Beach County, Florida, Five Star Business Brokers proudly transacts business sales throughout the areas of West Palm Beach, Lake Worth, Palm Beach Gardens, Boca Raton, Jupiter, Delray Beach, Boynton Beach, Wellington, Palm Beach, Royal Palm Beach, and Riviera Beach.